On organizations evolving: when short-term coping mechanisms become the new way of doing business

A couple weeks ago, one of my favorite arts bloggers, Andrew Taylor (a/k/a The Artful Manager) wrote a post whose title conveys a pretty strong thesis: Organizations don’t evolve; they cope. While I share Andrew’s skepticism of the field’s use of natural world metaphors (ecosystem, ecology, evolve, adapt, sustainability, etc.) it’s not because I think the metaphors don’t apply (within limits); it’s because I think we sometimes misapply them.

Andrew begins his analysis with a comparison between individual organizations and individual organisms, writing:

We’re calling on existing organizations to evolve to the new environment, as living organisms evolve to theirs. Only, individual organisms don’t evolve. They only cope. So, we can tell a nonprofit corporate organization to evolve just as effectively as we can tell a fish to grow opposable thumbs. Its traits and tendencies were inherited at birth. It can adjust its tendencies, it can retrain its reflexes, but it’s still a nonprofit corporate organization, even if it can do new tricks.

He then rightly points out a couple paragraphs later that there are differences between an organization and a fish:

An organization is a bundle of people, things, processes, and traditions, bound by contracts and covenants, and restricted in its operation by laws, codes, and norms. A fish is, well, a fish.

The distinctions that Andrew makes between an organization and a fish are critical; indeed, it is these very distinctions that would seem to make it possible for an organization to evolve and impossible for a fish to do so.

Moreover, I would argue that (legally constraining, in principle, as the form may be) the nonprofit corporation has demonstrated that it can be rather easily manipulated to ends (goals) other than the (educational or charitable) ones which any given 501c3 organization is presumably formed to pursue. In other words, where there’s a will to evolve, there seems to be a way.

***

Organizations are socially-constructed systems with goals, presumed to be shaped by the contexts in which they are established. Typically, variations in organizations have been perceived to come about primarily through the deaths of old forms and the births of new ones. With the birth of new organizations, variations may be introduced, some of which will be retained in the population.

The introduction of the nonprofit form in theater is a nice example. In the first half of the twentieth century it was relatively rare to find a professional, nonprofit theater company in the US. With the emergence of funding from the Ford Foundation, and later the NEA, the nonprofit form became (in the words of Arena Stage founder, Zelda Fichandler) the apava for resident theaters across the US. In a 2011 talk, she remarked:

There’s an expressive word, I believe it’s Sanskrit – and the word is apava – that translates as “the effective means to make a vision concrete” or workable or real. Our apava, strangely enough, turned out to be the nonprofit corporation. Some of us might take that fact for granted, but we shouldn’t. It’s the basic reality of our existence. Before nineteen hundred and fifty something, theatre was excluded from the benefits given to science, universities, charities, the church, opera, and maybe dance – but not theatre, because it made a profit. We knew that without the nonprofit blanket we could not exist, for it allows us to receive gifts and grants and to be free of taxes on tickets.

Beginning in the 1960s there was an exponential growth in the number of nonprofit theaters. Organizational ecologists would suggest this was a reflection of the legitimacy of the form over other forms and that this growth would continue until the population had reached its carrying capacity, and then it would begin to decline. The carrying capacity is the maximum population size that an environment can sustain indefinitely given available resources.

As an example of the growth and decline in a population, as part of HowlRound’s recent weekly series on Black Theater in the US, Sade Lythcott noted in her essay that “in the roughly ten-year span of the Black Arts Movement in New York alone (1965-1975), over two hundred black theaters emerged; today there are less than ten.” The decline in that population (not only in NYC but across the US) has been considered by some in the theater field to represent the struggle of black theaters to attain legitimacy, resources, support, meaning, etc: they were birthed in a certain context and as the environment around them shifted they were unable to compete and survive.

Likewise, it is rare these days to see a young contemporary choreographer form a permanent company in NYC with a large number of dancers on the payroll, or a resident theater company (in any city) formed with a permanent acting company.

And it’s not just certain forms of arts organization that are now harder to sustain; reading the “bracing” conclusion of the executive summary of the 2010 National Arts Index (as reported by Ben Davis), one wonders if we have reached the carrying capacity for the nonprofit form in the arts generally:

Given the profusion of underfunded organizations, the nonprofit model may have to be abandoned in favor of more experimental or market-oriented business models for the arts.

This is frequently how evolution in an organizational population is seen to occur: through the death, birth, and (importantly) growth of some organizations (and not others) in response to a shifting environment.

But as we have seen now and then, and as more recent research has theorized, it’s not only populations that can evolve. Individual organizations themselves can transform (sometimes dramatically, sometimes incrementally) and do. While a fish may not be able to grow a new central nervous system, an organization, in essence, can.

An organization can “unlearn” practices and beliefs and norms and strategies, and learn new ones. It can shift its “dominant logic.” One paper on this topic (Bettis & Prahalad, 1995 – The Dominant Logic: Retrospective and Perspective) asserts that this “unlearning” and “shift in logics” may be more likely to occur out of a period in which an organization experiences a high degree of instability. (Of course, this is not always the case: other possibilities arising from instability are that the organization will survive and revert back to the status quo, or simply fail entirely).

It’s not hard to identify arts organizations that have been transformed out of periods of duress. The Louisiana Philharmonic Orchestras is a musician-owned and –led orchestra that formed after the demise of the New Orleans Symphony. The fact that the name has changed is less important than the fact that many of the same people re-organized and re-formed with new goals and a different structure and relationship between management and musicians.

Or consider the new strategies introduced in the opera world when Peter Gelb traveled from Sony to the Metropolitan Opera (which was, at the time, struggling with declining audiences and financial challenges). Consider the way the HD broadcast adaptation, specifically, has begun to influence the creation, production, and distribution processes not only at the Met but in other organizations, as well, and has begun to change the relationship of audiences to the art form of opera.

Or look at how Diane Paulus has radically re-interpreted the mission of the American Repertory Theatre. She has changed the goals, relationships, identity, structure, and strategies of the organization in response to not only a changed “world” (i.e. larger societal context) but also changed expectations from ART’s “host,” Harvard University.

Of course, organizational evolution is rarely this dramatic. More often, it happens so slowly we don’t recognize it. Paulus did in one season what other theaters took two decades to enact.

We tend to talk about the arts and culture sector these days as though it is “stuck” – unable or unwilling to change – but it might also be useful to consider how the present state is a function of small adaptations (in structure, people, processes, culture) in response to a shifting environment and the persistence of some of those changes over time (i.e., those that were perceived to increase the chances of survival).

Evolution occurs both through adaptation and through the perpetuation of whatever is working well. In The Resilient Sector, Lester Salamon has suggested that we have been witnessing a long creep towards commercialism in the nonprofit sector in the US generally (not only in the arts), because this is, essentially, what the slings and arrows of the US system encourages.

With the lack of subsidies and increased competition for funding, what options exist for staying alive? Do an enhancement deal and produce a new musical; reduce production expenses and beef up the development and marketing staff; find a corporate sponsor and produce a sensational exhibition of some kind; hire a celebrity and charge $300 for tickets; avoid producing works that require a large number of actors or musicians or dancers and more than the standard amount of rehearsal time; replace an unknown work by an emerging playwright with last year’s Tony Award-winning work; or better yet, a revival of a well-known title by a household name.

In this sense, I agree with Andrew. Organizations often adopt coping mechanisms in response to changes in the environment and uncertainty. However, sometimes a coping mechanism, perhaps because it’s working in the short-term, becomes a longer-term strategy. It gets re-framed as a process innovation and becomes a new way of doing business — a model for existing organizations, or new ones being formed, to replicate. Eventually, one adaptation can begin to have repercussions on the audience, the art, and the identity of not just one organization, but on an entire organizational field.

Some of these changes may strengthen nonprofits and their ability to realize their missions and goals. Some may not.

Therefore, from my perspective, the question is not whether or not organizations can (and thus should be expected to) evolve; they do evolve. The question is how, and in response to what?

Comments

Thanks Diana, really interesting thoughts, as always. Given the seismic shifts in Europe which are being caused by severe custs to subsidy the question of how arts organisations need to change in response (evolution, transformation, merger, closure) is very topical. In Europe the time of the non-profit form may just be beginning. One associated problem is that for many working in these organisations, the organisational form has become synonymous with the purpose and this hinders change.

I’ve generally appreciated the ecosystem analogy, but I think too many of us ignore a key aspect of ecosystems when we make this analogy, because we don’t like it. Ecosystems (and economic markets, for that matter) are sustainable when they are in equilibrium. And equilibrium can be very different than our visions of what is right and just (as varied as our visions of justice are).

A system in equilibrium can’t have a very large population at the top of the food chain, for example. And I know I’m stretching the analogy a bit far, but you can’t have every good artist making the salary of a top symphony musician or Broadway performer, either. Natural ecosystems can’t support top-heavy population distributions; zoos can. Some of us would probably feel more comfortable in a zoo, I suppose.

At this point, I’ve pushed the analogy too far, I know. But I still assert that equilibrium is a real force to be reckoned with in the arts sector. It’s probably one of the most chafing, as well. And it’s different from organizational inertia; it applies to a larger system. Organizations can be frequently out of equilibrium (e.g. your coping examples). And systems can have periods of disequilibrium, too, but there is always going to be quite a lot of stress and tension (to an unsustainable degree–not the everyday tension) on the system until equilibrium is regained.

The term evolution has become somewhat generic. As Bjarke Ingels of the BIG architecture firm in Denmark has noted in his excellent book “Yes is More!” What Clarence Darrow said of Darwin’s theory of evolution in 1987 has some relevance here: “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change.”

Individuals and institutions adapt, species and fields (many institutions, such as cultural institutions) evolve. But, are we actually willing to ask the same questions about adaptation within the environment in which institutions in the nonprofit sector operate?

In our book “Cash Flow Strategies: Innovation in Nonprofit Financial Management” we look at ways both the nonprofit organizations and their environment must change to make more working capital available to nonprofit organizations. For example, requiring that the billions of dollars that annually receive tax preference by being donated to nonprofit organizations for social, educational, environmental and cultural purposes be used to provide a capital pool for dealing with social benefits, rather than becoming another source of revenue for the stock market through investments. Or, as Porter and Kramer have noted – a dollar spent by a nonprofit organization within a year generates a dollar’s worth of social benefit. A dollar donated to a foundation, financial service organization with a donor directed focus, or an institutional endowment can take 40 to 100 years to generate a dollars worth of social benefit.

All of which suggests that we need to question the way the environment is operating and adapting, at the same time we question that practices of nonprofit institutions. By creating a requirement that donated funds be spent for a legitimate social or cultural benefit within two years, in order to qualify for a tax deduction, we are simply urging the players in the environment to sustain the original purpose for which those dollars were given – namely to help address the social, cultural, educational, environmental, and public purposes. Funds that are not spent within two years would qualify for the tax deduction if they were used to encourage various forms of social investment, by nonprofits, within a vastly expanded marketplace for public investment. In short, a complex capital pool focused on fulfilling the promise of the original tax deduction.

Perhaps we need to think of adaptation as more of a two way street. After all, considering a little legislation would promote some serious change in the nonprofit world, in an adaption that works both ways.

Terrific to hear from you! … I like very much these ideas of pooled capital and keeping resources flowing to the social or cultural aims they are intended to support. It seems that pooled capital could also help to address this issue that many have observed, which is that the nonprofit system seems to mirror the winner-take-all society in which its embedded in the US: a few organizations at the top capture a large majority of resources. Essentially, those with money get to determine which organizations thrive and which struggle and their preferences may be completely out of touch with those of the rest of the community. I have at times wondered whether it would be beneficial to require the pooling and redistribution of the percentage of each contribution that represents a loss in taxes paid. This could be done through a local community foundation or arts agency, perhaps, with the goal of circulating resources for the benefit of an entire ‘ecosystem’ (so-to-speak) of arts organizations rather than simply a few at the top. This would, no doubt, be controversial because the current system is designed to enable the donor to control the social ends to which his/her tax dollars are spent … But we have no checks and balances in the current system to ensure that we aren’t growing some organizations at the expense of others (or the expense of other social amenities, for instance). It seems we need to address this imbalance. It’s an underdeveloped idea, to be sure–perhaps fatally flawed–but I’d be curious what you think, or if you know if this has been proposed or tried?

Trying to reallocate funds after they have been donated is problematic for the reasons you cite, but also because the judgment of what is “fair” is highly subjective. It is a solution, but one that would encounter tremendous resistance. Think about the difficulties that the trustee responsible for allocating aid after the disaster on the Gulf Coast has had in satisfying the conflicting parties.

Our proposed legislation is designed to be a simple fix, in the sense that it requires that funds donated for a purpose that qualifies as tax exempt should be used for those purposes and not as an investment pool for institutions that are hoarding the vast percentage of wealth in the nonprofit world. In the late 90’s the IRS did a series of studies on resource allocation in the nonprofit world. The studies which still have particular relevance showed that 5% of all US nonprofits own 89% of the financial assets of the nonprofit universe and that they receive 80% of all revenues within the sector. Put another way, 95% of all nonprofit organizations struggle and compete for 20% of the revenues in the field and hold roughly 11% of all the assets in the field. Talk about inequality. Incidentally, of the assets held by the top 5%, 73% were invested. Which means they were directly benefiting the corporate community, with only a fraction of the returns being applied to social causes.

We need to get back on track. We need to insure that every dollar that gets a tax exemption is used “now” to create a social benefit. Simply raising the funds for endowments, which J. G. Dees in his book “Enterprising Nonprofits: A Toolkit for Social Entrepreneurs” notes requires raising $20 to earn $1 per year in marginal interest seems like a terrible way to address the problems that are before us. What we need to do is focus on making sure that the money we all release as a tax deduction is used to help us solve the many problems the corporate and the governmental world are not prepared to address.

All nonprofits operate within the general framework of contemporary philanthropy. A glance at the record of U.S philanthropy should be enough to demonstrate that the current system of investment of assets and the distribution of the earned marginal interest – the payout – is an inadequate strategy for accomplishing the social, environmental, and cultural purposes of our society. As a corporate form, philanthropy, in the modern sense, is three quarters of a century old. Yet, in many respects it has not proven successful in solving the fundamental issues that our society and our world faces. The problem, as both critics and advocates agree, is there is simply not enough money to address the complex issues of need.

Yet, this is only true if one accepts the conventional way in which institutions have chosen to handle their money. Foundations and donor-directed funds, plus institutional endowments and cash reserves, emphasize investment and payout. “Send that money off to Wall Street, or off shore to the Cayman Islands and watch it grow. Then take the interest, less administrative costs, fees aplenty, and a three to five year rolling average of inflation that goes back into the pot to sustain the buying power of the funds, and what is left can help society” As we can see, from a fraction of the investment interest (nationally about 3.5% on the dollar for the past fifty years) grants can be made. Given this system of managing capital, it is no surprise that grant makers and donors are saying no to a majority of their applicants. Existing money management practices (the investment/payout approach) clearly dictate a shortage of money when compared to the working capital needs of the nation’s nonprofit organizations.

A major consequence of the “investment-payout model” used by philanthropy is one of the most commonly cited statements by grant makers or donors: “We are not interested in providing funds for day to day operations, it is too expensive.” And so this flawed approach to money management delivers a crushing blow to institutions seeking to fulfill their mission, but still needing to sustain their operations.

As champions of working capital for nonprofit institutions, we believe it is time to change the rules of the game: the rules that dictate how funds are handled and disbursed by foundations, by donor-directed financial service businesses or by the endowments and cash reserves held by nonprofits, themselves. The promise of these changes is an enormous increase in the amount of working capital available to nonprofit organizations to pursue their mission. And, since none of the rules of the current system of philanthropy are mandated or cast in stone, the change that we propose is largely one of perception, with the help of a single, simple piece of legislation.

We know that foundations, donor directed funds, and institutional endowments invest the majority (in most cases close to 90%) of their funds in stocks, bonds, and other assets that only benefit corporations and other commercial enterprises. Isn’t it time to consider an alternative? Our suggestion is that Congress – as dysfunctional, partisan, and pathetic as it currently is – be lobbied to change the rules to keep the money that has been granted tax exempt privilege within the sector that benefits society rather than multinational corporations and investment bankers. We propose that this legislation be called “A Fair Share for the Public Act.” The legislation would instruct the IRS to require than any contributed funds received by a nonprofit institution or foundation or donor directed fund and retained for more than two years be fully invested in bonds or other financial instruments issued to create working capital for organizations that qualify for credit in the nonprofit sector.

In other words, let us just take all the money that has received a tax exemption as a charitable contribution and apply it to the social, educational, health care, environmental, and cultural realms it was intended to serve. Rather than sending the majority of these funds to Wall Street to benefit the brokers, the corporations and assorted commercial interests, let us use the money to do something positive and constructive in the nonprofit sector. After all, if those funds had been taxed at the full rate, the government would have the increased revenues and some of it might have actually served the public interest.

To allow time for the money markets to ramp up the instruments needed to address the working capital needs of the nonprofit world, we suggest that in the first five years, 25 % of the new contributions of foundations, endowments, or donor-directed funds be invested in these efforts. The percentage of increased participation would rapidly accelerate after the first five years. By the seventh year, 75 % of the portfolios would be invested in the nonprofit sector, and by the tenth year, 100 % would be invested in capital markets designed to benefit nonprofit institutions.

There is plenty of money kicking around the nonprofit world. The problem is very little of it is currently being used to promote the very social benefits that a tax exemption was designed to encourage.

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Diane Ragsdale

Diane is currently attending Erasmus University in Rotterdam (in the Netherlands), where she is researching the evolution in the relationship between US nonprofit theaters and Broadway and working towards a PhD in cultural economics. Read More…

Jumper

About 20 years ago, when I was in graduate school, I came across the following poem:
When an old pond
gets a new frog
it’s a new pond.
I think the inverse also may be true.
I’ve often been the new frog jumping into an old pond. Since 1988, I’ve worked in the arts in the US in various roles … [Read More...]

If you want a quicker read, then you may want to skip the speeches and opt for the article, "Recreating Fine Arts Institutions," which was published in the November 2009 Stanford Social Innovation Review.

Here is a recent essay commissioned by the Royal Society for the Encouragement of the Arts for the 2011 State of the Arts Conference in London, "Rethinking Cultural Philanthropy".

In 2012 I documented a meeting among commercial theater producers and nonprofit theater directors to discuss partnerships between the two sectors in the development of new theatrical work, which is published by HowlRound. You can get a copy of this report, "In the Intersection," on the HowlRound Website. Finally, last year I also had essays published in Doug Borwick's book, Building Communities Not Audiences and Theatre Bay Area's book (edited by Clay Lord), Counting New Beans.